Unit-I

Cost Accounting

Q1) Define Cost Accounting and how did it Evoluted?

A1) Costing:

The Society of cost control accountants (ICMA) London defines costing as a confirmation of costs, and costing includes the technology and process of confirming costs.

Cost accounting:

The Society of cost management accountants (ICMA) in London defines cost accounting as"the science, art and application of the principles, methods and techniques of cost accounting and cost accounting to the practice of cost management and confirmation of profitability, as well as the presentation of information for the purpose of management decision making". Therefore, cost accounting includes costing, costing, Budget Control, cost control, and cost audit. Costing refers to the process of determining and accounting for the cost of a particular product or activity. It also includes classification, analysis and guessing the production of costs.

Costing:

I.C.M.A.London defines costing as"the process of accounting for costs from the time when expenditures occur or from the time when they are committed to establishing the ultimate relationship with cost centers and cost units."

In practice, costing, costing, and cost accounting are often used interchangeably. Cost accounting refers to the confirmation of costs, the accumulation and measurement of costs of activities, processes, products or services. Cost data is used to create costing sheets or cost sheets. Costing is a professional Department of accounting that helps manage costs to control and create awareness of the importance of costs to the well of the business organization. Managing a business to achieve its objectives requires systematic and useful cost data and reporting.

Evolution of Cost

Widespread interest in the subject of costing can be said to have developed in the Industrial Revolution, which began in 1760. As the factory system was followed by mechanization, simplification, standardization and mass production, costing had to keep up with these developments. Until the 18th century, costing was in the area of Engineers. Integration with financial accounting began when accountants began to audit cost records. Under the influence of financial accountants, costing came to be seen almost exclusively as a means of inventory valuation and profit measurement.

Costing has been found to assist in managing when compiling and providing the required statistical data.  It has developed rapidly and assisted management of providing valuable information to take appropriate decisions in time. Costing sheds light on excessive waste of materials, inefficient labor operations, idle machinery and many other similar factors that are responsible for the reduction of profits in business activities. Management has found that costing can provide valuable assistance in planning, managing and coordinating activities.

Q2) Write short note on Cost Center and Cost units.

A2) Cost center: A cost center is a place, person or asset that can be checked for costs and used for cost management purposes. This is an organizational segment or area of activity that is used to accumulate costs. The different types of cost centers used in manufacturing organizations are personal cost Cantor, impersonal cost center, work cost center and process Center.

Cost units: A cost unit is a unit of the quantity of a product or service for which the cost is likely to be confirmed. There should be a unit of activity for proper confirmation of costs. Every organization has its own units for the measurement of raw materials and finished products. When the unit of activity is determined, it becomes the cost unit of the cost accountant. The cost unit must be suitable for your organization. The following is an example of cost units in different industries :-

Q3) What are the Objectives of Cost Accounting?

A3) Cost accounting goals are usually used to indicate activities in which costs must be determined individually. Activities can be functions for which data is required,sub-divisions of the organization, contracts or other units of work. There is a direct relationship between the information needs of management, the purpose of costing, the technologies and tools used for analysis in costing. Therefore, costing has the following purposes-

• Determine the cost of the product.
• To facilitate the planning and management of regular business activities.
• Provide information for short-term and long-term decisions.

Q4) When you install,how does the costing system looks ?

A4) When you install, the costing system looks like this:-

1         Costing reveals areas where materials were overused, Labor ran inefficiently and expenses incurred exorbitantly.

2         We propose a cost reduction program. Continuous costs in collaboration with technical personnel seeking areas for introducing cost savings bring beneficial results.

3         Cost accounts find specific causes for profit fluctuations. It points out that you lose products and operations. This indicates the reason for the loss and suggests corrective actions in time.

4         Provide management with the right data to choose the best option. You can decide whether to buy or manufacture parts, operate the Machine X or Y, accept or reject orders below the cost

5         The cost account gives the actual costs for price fixing. True supply and demand play an important role in fixing prices. But the cost is an essential guide here.

6         It provides important data up to in the bid. Bids filled with the help of marginal costing technology are successful.

7         Standard Costing and Budget Control help maximum efficiency.

8         Cost comparison helps cost control. Such comparisons can be between different periods of the same department or equivalent operations of different units.

9         Cost data is useful for external institutions such as governments,courts, etc.To make decisions on tariff regulation,settlement of disputes,fluctuations in wage levels, etc.

10    It can play with capacity costs to help overcome operational crises.

11    Marginal costing technology helps to make appropriate short-term decisions in times of trade recession.

12    Costing lays cost center and responsibility center to ensure proper organizational structure.

13    Costing provides a permanent inventory system. This enables inventory management and the creation of short-term profit and loss accounts.

14    The cost of closing the stock of raw materials, work in progress and finished products is readily available in the cost record.

Q5) Define Financial Accounting.Write its Limitations too.

A5) Financial Accounting is concerned with providing information to external users, such as shareholders, creditors, trade unions and government authorities. It is directed to the preparation of financial statements, that is, profit and loss accounts and balance sheets, summarizing the performance of the selected period and showing the financial situation at a certain date. It follows generally accepted accounting principles. Financial Accounting is an account for money. Financial accounting suffers from the following limitations, because financial statements are generic in nature and only one set of accounts is prepared and sent to all.

Limitations of financial accounting -

• Financial Accounting is primarily historical in nature.
• It does not give complete  cost details  for different jobs. Process or department.
• Because costs are not classified into fixed and variable, it is difficult to know the behavior of costs.
• It does not have the appropriate system of standards for assessing the performance of departments and employees.
• It does not provide information necessary for the management of taking important decisions such as pricing, special orders, alternatives etc.
• Annual reporting is a rule of financial accounting.

Q6) What are the Methods of costing?

A6) Several methods or types of costing have been designed to suit the needs of individual business requirements. These are job costing and process costing.

All other costing methods are either variants of these two methods or techniques designed for specific purposes, specific opportunities, and specific conditions.

Job costing:this method is good for checking the cost of a job, a specific order, or a batch of finished products.

Where the cost unit is a job consisting of a specific quantity manufactured according to the order. The work can be small or large. It may be as per customer order for stock for final sale. Other variations of job costing are given below: -

• Contract costing:this method is used by contractors for construction of architectural bridges etc. Where the unit of cost is the contract. The term of this contract usually extends beyond the current fiscal year.
• Batch costing: this method produces economical batches of parts for subsequent assembling manufacturers large engineering companies use this method. Here, costing is done for batches of components, not for a single component.
• Multiple costing:this is used in large industries such as automobile, aircraft flat industry etc.Here the cost of parts is calculated separately. Each component is a job sheet. These are then assembled to complete the cost of an airplane or other finished product.

Process costing:this method is used in industry to manufacture products by continuous process. The cost is confirmed over the period by the process or department, but time is given more importance here as it is clear from the costing of the work. Therefore, this is also called period costing. Examples of industries that use process costing are the chemical industry, papermaking and refineries. The process costing can also be changed without:

• Work costing:work costing is applied to places where production goes through multiple operations in succession before the final product is manufactured. Wear and tear may occur in each operation. Work costing is used in industries such as Box manufacturing, shoe manufacturing and toy manufacturing. Where the cost unit is the work on which costs are accumulated.
• Single or output or individual costing: examples of industries applying this method are mining, quarry and steel production where the production is of a continuous nature and the final product is only one or different grades of the same product.
• Behavior costing:this method applies not to figure out the cost of drawing. Examples of industries using this method are transport services, electrical and boiler houses. In transport services, the unit of cost is passenger kilometers, or kilometers kilometers.

Q7) What are the essentials of a good costing system?

A7) The essentials of a good costing system are:

• The costing system must conform to the General Organization of the business. Usually no component alternation should be made to facilitate the costing system. However, unavoidable changes can be made in the establishment of the position of holding, and proper costing system.
• All relevant technical aspects (nature and method of production, product varieties, etc.) should be properly considered in order to adopt appropriate cost control ingenuity.
• The size, placement and configuration of the factory should be fully described for the advantages of those operating costing systems.
• It is necessary to clearly specify the procedures that must be followed for the purchase, receipt, storage and issuance of materials.
• It is necessary to specify the method of payment of wages and the system of labor management.
• It is necessary to specify the norms of appointment and assignment of overhead.
• Economics to ensure that the original record can be proper.
• Form should be obtained printed. It should contain full instructions. Those who use them should be properly trained to ensure the correctness and relevance of the data written on the form.
• The Examiner must check and sign all entries in the form.
• Responsibility for preparing and sending cost reports to various levels of management at regular intervals should be fixed and the necessary instructions in this regard be issued.
• Full cooperation from everyone involved in management should be enlisted. Resistance from employees should be minimal.
• The cost of managing a costing system must be commensurate with the profit available from it.
• Design the system appropriately to effectively perform cost control.
• Cost accounts and financial accounts must be linked. Or the results of two sets of accounts should be adjusted.
• Frequency, regularity and speed in the presentation of cost reports should be guaranteed.

Q8) Distinction between Cost & Financial Accounting.

A8) Costing is a close follower of financial accounting. It is not independent of financial accounting. There are common reasons between the two, but the key differences are:-

1)     Reporting:While the main purpose of financial accounting was external reporting, the focus of costing was essentially internal, i.e. management.

2)     Flexibility: Financial Accounting is primarily historical or post-event, costing is much more flexible and open-minded, and is included in both retrospective and predictive calculations.

3)     Nature: Financial Accounting classifies, presents records and interprets in terms of money transactions, whereas costing classifies, Records, presents and interprets material, labor, and overhead costs involved in the manufacture and sale of each product in a material way.

4)     Financial accounting uses Generally Accepted Accounting Principles to record, classify, summarize and evaluate business transactions, but costing is not bound to use GAAP and can use techniques or practices that generate useful information.

5)     Period:Financial accounting data is developed over a certain period of time, usually a year, half a year or quarter, but you can create costing reports and statements whenever you need them.

6)     Accounting method: Financial accounting follows a double filling system for recording, classifying and summarizing business transactions. The data under costing can be collected for a small or large segment or activity of the organization, Monetary as well as other measures can be collected by the organization.

Q9) Mention the importance of Cost Accounting.

A9) Importance of Cost Accounting

Costing is very important for commercial organizations. It also helps other organizations. One of such areas is the presentation of information in the most useful way. Costing is used to measure, analyze, or estimate costs. Reporting to stakeholders on the profitability and performance of individual products, departments and other segments of an organization, internal or external, or both costing concerns the synthesis and analysis of costs. Its purpose in modern times is to support management in the twin functions of decision-making and control. Therefore, costing is not just about finding costs, but advises on the management, planning and management of organizations and business operations. The Companies Act also stipulates that certain companies must maintain cost accounting records and accounts and conduct audits of cost accounts.

Q10) What are the advantages of Cost Accounting?

A10) Advantages of Cost Accounting are:

• Costing reveals areas where materials were overused, Labor ran inefficiently and expenses incurred exorbitantly.
• We propose a cost reduction program. Continuous costs in collaboration with technical personnel seeking areas for introducing cost savings bring beneficial results.
• Cost accounts find specific causes for profit fluctuations. It points out that you lose products and operations. This indicates the reason for the loss and suggests corrective actions in time.
• Provide management with the right data to choose the best option. You can decide whether to buy or manufacture parts, operate the Machine X or Y, accept or reject orders below the cost
• The cost account gives the actual costs for price fixing. True supply and demand play an important role in fixing prices. But the cost is an essential guide here.
• It provides important data up to in the bid. Bids filled with the help of marginal costing technology are successful.
• Standard Costing and Budget Control help maximum efficiency.
• Cost comparison helps cost control. Such comparisons can be between different periods of the same department or equivalent operations of different units.
• Cost data is useful for external institutions such as governments,courts, etc.To make decisions on tariff regulation,settlement of disputes,fluctuations in wage levels, etc.
• It can play with capacity costs to help overcome operational crises.
• Marginal costing technology helps to make appropriate short-term decisions in times of trade recession.
• Costing lays cost center and responsibility center to ensure proper organizational structure.
• Costing provides a permanent inventory system. This enables inventory management and the creation of short-term profit and loss accounts.
• The cost of closing the stock of raw materials, work in progress and finished products is readily available in the cost record.

Not all organizations get all the advantages mentioned above.